Bank of America Corp. (NYSE: BAC) is the third-largest U.S. bank by market capitalization behind Wells Fargo & Co. (NYSE: WFC) and JPMorgan Chase & Co. (NYSE: JPM). The company had about $135.6 billion in market capitalization as of June 30, 2016, but the large-cap equity valuation is outsized by the bank's over $2.1 trillion in total assets. To have financed for such an enormous asset base, Bank of America had to use a considerable amount of debt under a capital structure that must also satisfy stringent core capital requirement imposed by financial regulators, based on the amount of risk-adjusted assets.
Bank of America's equity capitalization, as measured by its book value, was $267.1 billion as of June 30, 2015, which was about twice the size of its equity's then market capitalization of $135.6 billion, a discount to the equity's book value. The bank's equity book value includes capital from preferred stock. While companies do not use preferred shares often, the banking industry has made issuing preferred stock almost a norm to help increase a bank's equity capital and reduce debt leverage.
Since 2011, Bank of America has maintained the value of its nonredeemable preferred stock at a level of more or less than $20 billion, about 10% of its total equity. Preferred capital can be expensive with competitive dividend rates, but it offers banks the flexibility of better managing cash flows without being forced to make scheduled principal repayments. On the common equity side, Bank of America's retained earnings have had positive accumulations each year since 2011, resulting in total equity expansions over the years.
With its improved equity capitalization over time, Bank of America has seen its total debt level coming down since 2011, for both total long-term debt and total short-term borrowings. Customer deposits are not counted as debt incurred by the bank, but rather a liability for the bank. As of June 30, 2016, Bank of America had over $1.2 trillion in total deposits, a major funding source for its banking operations. However, no banks can lend out all of their deposits. Bank of America had $171 billion cash on hand, as of June 30, 2016, which was close to 15% of its total deposits.
Even with over $1 trillion of funds in deposits, Bank of America still held $440.7 billion in total debt as of June 30, 2016, about one-third of its total deposits, to help carry out its enormous banking activities, including loan underwriting, making various investments and maintaining a required level of federal funds with the Federal Reserve. Bank of America's total debt/equity ratio was 1.6 as of June 30, 2016, compared to a 2.9 ratio for its main peers and the industry average of 2.1. The bank's capital structure was composed of 37.7% equity and 62.3% debt as of June 30, 2016, and was its least debt-ridden capital composition since 2011. The lower its debt leverage, the more safely the bank can absorb potential asset losses.
Part of a company's enterprise value depends on the market valuation of its equity on the books. Thus, for Bank of America, its discounted market capitalization to the equity's book value has negatively affected the bank's enterprise value. However, market capitalization had risen from only $58.6 billion at the end of 2011 to $152 billion as of Aug. 11, 2016. With the reduction of its debt over time helping to strengthen the bank's financial position and potentially continued positive earnings results as those achieved over the last five years from 2011 to 2015, Bank of America could expect further increases in market capitalization and improved enterprise value as a result.